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Liquidity investment approach

Our distinct Focus on Change investment philosophy places significant emphasis on rigorous research and a strong collaborative ethos. We constantly think ahead and strive to anticipate change before it happens; this is a key principle in managing the credit and liquidity risks within our liquidity funds.

People and process

The core tenets of capital preservation, maintenance of liquidity and return stability are at the centre of our liquidity investment proposition. To achieve this, we actively manage diversified pools of high-quality short duration assets and benefit from a segregated credit control function.

We base our liquidity investment process around a dual investment structure that provides a disciplined balance of risk and reward. While our liquidity team actively manages the liquidity fund range, an independent, ring-fenced credit research team undertakes credit analysis. The process also benefits from our broader investment capabilities, including input from our macroeconomic, equity and rates teams.

Credit research

The primary function of our credit research team is to undertake a thorough analysis of all existing and new counterparties. In doing so, the team’s main aim is to preserve capital and ensure that counterparties meet the minimum credit standards as set out in fund guidelines. Our credit analysis follows a standardised approach and we require a full review of approved counterparties at least once a year. This review includes a thorough analysis of historic and prospective trends in the counterparty’s capital, liquidity, earnings and asset quality metrics, as well as an assessment of management quality, business position and industry trends.

We produce a full financial template to complement the qualitative analysis. We feed the analysis results into our proprietary model, which gives a quantitative score for all counterparties. In turn, this helps us map an internal rating. This process reduces the reliance on external ratings and helps with early identification of potentially negative trends.

The credit research team presents its findings to our credit committee, which meets once a month. At these meetings, analysts recommend whether the counterparty remains appropriate for inclusion on the approved list, as well as the requirement for a maturity limit that caps the term of any lending to the counterparty. Each analyst’s review and recommendations are subject to peer challenge in order to ensure robust analysis. The committee can then ratify any decisions.

In addition to the formal analytical approach, a core part of the credit process is monitoring all approved counterparties on a day-to-day basis to ensure they continue to meet the minimum standards. This involves meeting management regularly, understanding the implications of changes to the regulatory and political backdrop, as well as communicating any changes to the counterparty’s credit profile. If the analyst judges there have been significant changes, they can suspend any counterparty from the approved list immediately or change the maturity restriction.

Portfolio management

Our dedicated and independent credit research process allows the liquidity team to focus solely on managing our liquidity funds efficiently with the aim of generating the best possible risk-adjusted returns.

In doing so, the liquidity team has discretion to allocate agreed credit budgets in the most efficient and economically beneficial way across both asset classes and tenors. Our stable internal investor base (e.g. Standard Life) enhances this approach as our scale means we are a strategically important investor for most bank counterparties. The strong historic performance of our funds demonstrates our ability to achieve advantageous returns.

The liquidity team also enjoys the full support of our broader fund management capability when managing our liquidity portfolios. For example, the liquidity team has a daily meeting at 8am to discuss market conditions. A representative of the team then attends a cross-team (including the strategy, equity, credit and rates teams) meeting at 9am where they share market conditions and strategy. There is also a monthly formal strategy meeting where we document our investment view.

Papers produced from this feed directly into the wider Standard Life Investments house view. This collegiate approach allows the liquidity team to implement informed decisions quickly and efficiently, maximising value and opportunity for our clients.

Risk management

Ongoing risk management is a key part of our investment approach. To achieve this, our dedicated investment risk management team ensures that we understand and control the level of risk taken within portfolios and that it stays in line with client expectations.

The team analyses portfolio risk profiles on a regular basis, examining both macro and individual asset factors, pinpointing the key drivers of risk and return. In addition, the team applies a range of comprehensive stress tests to support our portfolio construction process and achieve our capital preservation and liquidity objectives. These stress tests simulate portfolio performance during hypothetically extreme market conditions, including severe interest rate and credit spread shocks, as well as significant redemptions by investors.

Together, this stress testing and risk profile analysis helps us to ensure the ongoing integrity of our investment capabilities and to deliver our key objectives.